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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended: December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________________ to ____________________
Commission File No. 0-27432
CLEAN DIESEL TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 06-1393453
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation of organization)
Suite 702, 300 Atlantic Street
Stamford, CT 06901
(203) 327-7050
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(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.05 par value per share
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Aggregate market value of the voting stock held by non-affiliates of the
registrant based on the average bid and asked prices of March 7, 2000:
$5,299,053.
Indicate number of shares outstanding of each of the registered classes of
Common Stock at March 7, 2000: 2,594,456 shares Common Stock, $0.05 par value.
Documents incorporated by reference:
Certain portions of the Proxy Statement for the annual meeting of stockholders
to be held in 2000 described in Parts II, III, and IV hereof are incorporated by
reference in this report.
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TABLE OF DEFINED TERMS
<S> <C>
Term Term Definitions
- ---- ----------------
ARIS(TM)2000 The Company's Advanced Reagent Injection System for Urea SCR
CARB California Air Resources Board
CDT Clean Diesel Technologies, Inc.
CNG Compressed Natural Gas
CO Carbon Monoxide
CO2 Carbon dioxide
DOCs Diesel Oxidizing Catalysts
DPFs Diesel Particulate Filters
EGR Exhaust Gas Recirculation
Fuel Tech Fuel-Tech N. V., 21.8% Equity owner of the Company
HC Hydrocarbons
LOE-NOx(TM) The Company's diesel fuel water emulsion technology
NESCAUM North East States for Coordinated Air Use Management
NOx Nitrogen Oxide
PFCs Platinum Fuel Catalysts
Platinum Plus(R)DFX The Company's Platinum & Cerium fuel additive
PM Particulate Matter
SCR Selective Catalytic Reduction
SwRI Southwest Research Institute
US EPA United States Environmental Protection Agency
VERT Program Program in Germany and Switzerland to develop, test and certify diesel
particulate filter systems
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Part I
Forward-Looking Statements
Statements in this Form 10-K that are not historical facts, so-called
"forward-looking statements," are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Investors are cautioned
that all forward-looking statements involve risks and uncertainties, including
those detailed in the Company's filings with the Securities and Exchange
Commission. See "Risk Factors of the Business" in Item 1, "Business," and also
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Item 1. Business
General
The Company ("CDT"), a Delaware corporation with a principal place of
business at 300 Atlantic Street, Stamford, Connecticut 06901, is a specialty
chemical company supplying fuel additives and systems that reduce harmful
emissions from internal combustion engines while improving fuel economy. The
Company's two main technology areas are Platinum Fuel Catalysts ("PFCs") for
emission control and fuel economy improvement in diesel and gasoline-fueled
engines, and nitrogen oxide ("NOx") reduction systems and chemicals for control
of NOx emissions from diesel engines. During December 1999 the Company received
its United States Environmental Protection Agency ("US EPA") registration for
its platinum - cerium product and, in the opinion of management, is no longer a
development stage company.
The Company was formed in 1994 as a wholly owned subsidiary of Fuel-Tech
N.V. ("Fuel Tech"), which had conducted fundamental work regarding the Company's
technologies. The Company was spun off by Fuel Tech in a 1995 Rights Offering,
at which time Fuel Tech retained 27.6% of the Company's outstanding stock. The
Company's technologies were acquired by assignment from Fuel Tech or developed
internally.
Global Trends in Diesel Emission Control
Throughout the world, combustion engine development is influenced by two
primary concerns. First is the increasing concern for global warming and second
is the concern over exhaust emissions, especially particulate matter ("PM") and
NOx emissions. Each affect the environment and human health because of the
toxicity of particulate particles and the creation of ground-level ozone by NOx.
Carbon dioxide ("CO2") emissions have been identified as contributing to
the greenhouse effect. The Kyoto Protocol (1997) set out to address this issue.
Since CO2 is the inevitable result of combustion of fossil fuels, the primary
way to reduce CO2 emissions is to reduce fuel consumption. The diesel engine is
the most fuel-efficient power unit. Thus the increasing use of diesel engines,
as opposed to gasoline engines, is considered one way to reduce fuel consumption
and thereby CO2 emissions.
Particulate and NOx emission concerns have been addressed by the US EPA
and the European Community, who continue to set standards prescribing
substantial reductions in PM and NOx. The regulatory process is progressive. New
vehicles in the year 1999/2000 have to meet emission levels some 70-80% lower
than ten years ago. Further reductions have been defined for the years 2002
through 2007 and another tier of reductions has been proposed for 2007 and
beyond.
Reducing diesel engine fuel consumption and PM on the one hand, and NOx
on the other, are opposing objectives: When diesel engines are re-tuned to
minimize fuel consumption or PM, their output of NOx is sharply increased and
vice versa. Moreover, while modern diesel engines have very low PM emissions by
mass, the number of fine particles emitted remains high. Modern diesel engines
tend to increase the particulate count while reducing total particulate mass.
The only proven way of reducing the number of small particles is by using
after-treatment filters. Consequently, engine manufacturers are increasingly
looking to after- treatment systems for the reduction of both fine PM particles
and NOx.
Recent events that will have a major impact on the development and use of
after-treatment systems are:
European Light-Duty Vehicles
PSA Peugeot has announced the introduction of diesel particulate filters
on its large engines (604 series) in 2000. PSA Peugeot manufactures some 1.3
million of the 4.0 million light-duty diesel engines made annually and is
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understood to have invested heavily in new technology for light-duty diesel
engines. Ford Motor Company and PSA Peugeot have announced cooperation on diesel
engine development and manufacture. The PSA Peugeot particulate filters use a
cerium additive to regenerate the filters. All European light-duty manufacturers
are now actively developing particulate filter systems using fuel additives.
European Community Regulations
New vehicle regulations for 2005 were approved by the European Union in
November 1999. These regulations are intended to force the use of particulate
filters by all new heavy-duty diesel engines from 2005.
European Retrofit Programs
Germany and Switzerland have taken a lead in requiring diesel particulate
filters to be fitted on all diesel engines used in mining and tunneling. The
regulations were developed as a result of a major government-industry
cooperative program (the "VERT Program") to develop, test and certify diesel
particulate filter systems.
The requirements, which apply, to both new and retrofit applications are
now being implemented on a progressive basis. As the performance and reliability
of these certified systems are demonstrated, further programs are being promoted
to extend the requirement to use particulate filters for construction equipment
and urban buses.
US - Retrofit Program
The United States Environmental Protection Agency (US EPA), the
California Air Resources Board (CARB) and the North East States for Coordinated
Air Use Management (NESCAUM) have announced a program for application of
retrofit technologies for emission reduction from diesel engines with focus on
reduction of particulates and NOx. The program requires that the retrofit
technologies are certified, provides for states to regulate the use of such
certified technology and also provides a basis for fiscal incentives and state
regulations.
Technologies for Control of NOx Emissions from Diesel Engines
There are two proven technologies that are candidates for adoption in
2002-2005:
Exhaust Gas Recirculation ("EGR")
This technology has been developed by most, if not all, engine
manufacturers. It involves recycling a portion of the exhaust gas to modify the
combustion process in a way that reduces NOx. While the principle is simple, its
application leads to several problems:
o PM emissions increase significantly,
o Fuel consumption increases,
o Heat rejection is increased by 20-40% (requiring more radiator space),
o Durability is reduced.
The problem with increased PM emissions is likely, in the Company's
opinion, to lead to a requirement for an after-treatment system to reduce PM
emissions. There are currently two proven devices: Diesel Oxidizing Catalysts
("DOCs") and Diesel Particulate Filters ("DPFs"). See "Products and Markets"
below for further information.
In the Company's opinion, the EGR system is the most developed system and
is likely to be adopted in 2002 for on highway use. Whether these engines will
need oxidizers (DOCs) or filters (DPFs) is not yet clear.
In the longer term, however, the EGR system is likely to be unable to
achieve the reduction in NOx levels anticipated. In that event, Selective
Catalytic Reduction ("SCR") technology is currently the only proven technology
that could be used.
Selective Catalytic Reduction ("SCR")
This technology has been in use for several years for large power
generation boilers and gas turbines and for very large stationary diesel
engines, 5000 HP and above. Its adoption for use with stationary diesels in the
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700 to 5000 HP range and for mobile diesels in the 250 to 600 HP range has been
limited primarily by the lack of a cost-effective system.
The process is noninvasive to the engine, allowing the engine
manufacturer to optimize the engine for minimum fuel consumption and minimum
particulates. This configuration is also optimal for engine durability.
The system comprises a tank of urea (a non-hazardous chemical used
primarily as agriculture fertilizer), an injection system for metering and
mixing the urea with the exhaust gas, and a catalyst to react the reactant gases
(from the decomposed urea) with NOx.
The system gives very high NOx reduction performance of up to 90% or more
but requires a separate urea tank and depends on a urea infrastructure being in
place.
SCR will likely be adopted for stationary engines and for many off road
applications where fuel economy and durability are priorities. The Company
believes that a near-term market is developing for SCR stationary diesel
engines, particularly for power generation, and that a market will develop for
mobile engines, both off road and on road, after 2002.
Technologies for Control of Particulates
If SCR is fitted for NOx control, then the engine can be tuned for very
low particulate emissions. However, emission levels regulated for 2007 are
expected to require use of particulate filters in addition to SCR, and such
systems are in development.
Diesel Particulate Filters (DPFs)
Several filters are being used or developed. There are several different
designs. The soot collected on the filter must be oxidized (burned), otherwise
the filter will eventually block. The soot will naturally burn at temperatures
above 560(Degree)C but diesel exhaust temperatures are typically much lower than
this. Metallic combustion catalysts are one way of promoting oxidation at lower
temperatures. Other methods include the use of electrical heating or diesel fuel
burners.
The DPF typically reduces PM by 90-99%.
Diesel Oxidizing Catalysts (DOCs)
These are flow-through devices with a catalytic surface. They are most
effective in reducing gaseous hydrocarbons and carbon monoxide. PM emissions
normally contain absorbed hydrocarbons. The use of DOCs substantially reduces
the absorbed hydrocarbons but, on its own, will not significantly reduce the
carbon content. On engines without EGR, DOCs will reduce PM by 30-50%. On
engines with EGR, the absorbed hydrocarbons are significantly lower and DOCs
alone have demonstrated less than 10% PM reduction in two test programs
conducted for the Company.
The Company's Products
Platinum Plus Platinum Fuel Catalysts (PFC's)
The Company has developed a family of fuel additives using precious
metals (primarily platinum) in minute concentrations in the fuel. Platinum is
well known as being one of the best combustion catalysts. The synergy of
platinum and cerium is also well known and used in catalysts for gasoline
engines as well as oxidizers for diesel engines. As a catalyst in the fuel, a
platinum-cerium bimetallic is even more effective, at very low addition rates of
4 ppm to 8 ppm of total metal, than cerium or other metallic additives at 20 ppm
to 100 ppm.
The platinum and cerium additive is currently used in the form of
organometallic compounds which are soluble in diesel fuel where they are stable
and mix easily.
Platinum Plus in the Engine
Platinum and cerium form a mixed oxide during the combustion of the fuel.
This mixed oxide deposits on the metal surfaces of the engine and catalytically
improves combustion especially in the late stages. The results of improved
combustion are:
o Improved fuel economy (2-8%)
o Reduced engine emissions
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Research shows that the above improvements build up over time. A test
showed that after 1,000 hours 96% of the platinum was being retained in the
engine.
Platinum Plus for Fuel Economy
Tests at an engine manufacturer in 1997 on a 5.9 litre engine fitted with
exhaust gas recirculation (EGR) showed 8% fuel economy improvement after 200
hours of running on "additive fuel". Tests at Southwest Research Institute
(SwRI) in 1998 on a Detroit Diesel Series 60 engine measured 4% to 5.5% fuel
economy improvement after 60 hours of treatment.
In a fleet test at a Midwest fleet in 1999, the fleet was divided into
two groups consisting of a control group which ran on diesel fuel without
additive and a test group which ran with the Company's additive, Platinum Plus
DFX treated diesel fuel.
After two months running results were:
% Of Fuel Economy Improvement
-----------------------------
Control Group (no additive) 0.11%
Test Group (with additive) 6.22%
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Net Improvement 6.11%
The fuel economy product is expected to show savings of two to three
times its cost depending on prices of fuel (which vary widely around the world
and from time to time) and the method of distribution.
Platinum Plus for Emissions Reductions
Used alone the PFC additive has shown the ability to reduce particulate
emissions by 10 - 30% as well as providing reductions in HC, CO and NOx. Tests
at SwRI demonstrated a 26% reduction in particulate emissions when running fuel
treated with the PFC. Several large power generation diesels in the State of
Maine using the PFC on a commercial basis reported particulate reduction of 29%
using treated fuel and an average of 45% particulate reduction and 15% NOx
reduction when using the PFC with engine modifications. The Company is
conducting tests to support the use of fuel treated with the PFC for emissions
credits under the US EPA voluntary retrofit/rebuild program.
Platinum Plus with New Engines and Diesel Oxidizer Catalysts (DOCs)
For the year 2000 and thereafter, many new low emission engines will
employ Exhaust Gas Recirculation (See above) to reduce NOx. Alone this
technology increases PM emissions and fuel consumption.
The PM emissions from such systems produce dry soot (low Soluble Organic
Fraction (SOF) high carbon content). DOCs have low effectiveness on this dry
soot. Tests show that Platinum Plus is particularly effective on engines with
EGR in improving fuel efficiency and reducing engine out emissions. Platinum
Plus is compatible with, and improves performance of, oxidizers. Research also
shows that the platinum-cerium bimetallic catalyst is effective at oxidizing the
carbon content as well as the soluble organic fraction of the soot and therefore
enhances the general performance of engine equipment with DOC's. In one test at
SwRI overall particulate reduction increased from 29% to 43% using the PFC with
a DOC while still reducing fuel consumption.
Platinum Plus with Diesel Particulate Filters (DPFs)
The platinum-cerium additive oxidizes the soot that collects on the
filter. The challenge is to oxidize the soot at the lowest possible temperature
with the minimum amount of metal additive, because excess metal additive
deposits on the filter, thereby, reducing the useful life of the filter and
adding to back pressure which in turn increases fuel consumption. The
platinum-cerium additive reduces the temperature at which the soot oxidizes
(regeneration temperature) by 200(degree) to 250(degree)C. This is 50(degree) to
100(degree)C lower than other metals. At the same time it improves fuel economy
and reduces emission of CO, HC and NOx.
The dose rate of the platinum-cerium additive delivers a metal content of
4 ppm to 8 ppm of metal in the fuel compared to 25 ppm to 100 ppm for other
metals. The ultra low dose rate of the platinum-cerium additive gives a major
reduction of ash accumulation in the filters and extends the useful life of the
filter.
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Platinum Plus and New Fuels
Platinum Plus has been shown to be effective with both current fuels (500
ppm sulfur) and lower sulfur fuels. Sulfur does not inhibit the catalytic action
of Platinum Plus nor is there a significant increase in sulfur emissions. Low
sulfur fuel is not required for use with Platinum Plus.
The tests at SwRI on a modern heavy-duty diesel engine using 368 ppm
sulfur fuel and a Corning particulate filter, demonstrated emission levels lower
than an identical compressed natural gas (CNG) engine certified to CARB's
standards.
12.7 liter Diesel Engine with DPF
EGR and Platinum Plus 368 ppm Sulfur 12.7 liter CNG Engine
(gm/bhp-hr) (gm/bhp-hr)
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NOx 2.31 2.0
HC 0.15 0.8
PM 0.009 0.02
Markets for Platinum Plus
After receiving its registration for Platinum Plus from the US EPA in
December 1999 (see "Health Effects" below), the Company started test marketing
its product through diesel fuel distributors and fleets and is currently in
discussion with potential licensees and additive marketing companies to
distribute the product both in the US and Europe.
The Company has established relationships with suppliers and blenders for
its products in the United States and is now doing so in Europe. Each 1 billion
gallons of fuel treated with the additive would represent revenues to the
Company of $20 to $30 million. The diesel fuel market worldwide is approximately
200 billion gallons per year and the United States consumption is estimated at
40 billion gallons annually.
ARIS 2000 - Advanced Reagent Injection System for Urea SCR (NOx Reduction)
The Company identified a market opportunity for SCR systems for use with
stationary diesel engines used primarily for power generation. The ARIS 2000 is
a single fluid injection and metering system complete with an electronic control
unit. The Company completed prototype testing of the ARIS 2000 system for
stationary diesels in 1999 as well as started sales of commercial systems for
evaluation programs to catalysts companies and engine companies.
The evaluation programs have demonstrated that by using the ARIS 2000
system, NOx reduction of 90% and more can be achieved on steady state conditions
with 85% on transient conditions.
ARIS 2000 - for Stationary Diesels
The Company decided that the most effective way to commercialize its ARIS
2000 technology was to license the technologies associated with NOx reduction.
In November 1999 the Company announced an agreement with the RJM Corporation, in
Ridgefield, Connecticut to license the exclusive marketing rights for the ARIS
2000 in North, Central and South America for stationary, railroad and marine
applications. (See Footnote 9, "Subsequent Events" to the accompanying Financial
Statements).
The Company has retained the right to market and license the ARIS 2000
for stationary use in Europe, Asia and Africa. The Company is currently seeking
licensees for these.
ARIS 2000 for Mobile Diesels
The Company has retained worldwide rights to the ARIS 2000 for mobile
applications. The ARIS 2000 was designed to be adaptable to automotive use and
for automotive components. Mobile prototypes of the ARIS 2000 have been made and
installed on test vehicles. The Company is offering the technology for license.
Patents offered for license are:
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US Patent No. 5,975,475 - A fundamental concept patent of a return flow
injection system which, provides cooling of the injector and a solenoid,
actuated injector which precisely meters the flow of urea into the
exhaust gas. No compressed air is required.
US Patent No. 5,968,464 provides additional enhancement by converting
aqueous urea to ammonia within a pyrolysis chamber to assist
decomposition.
US Patent No. 5,924,280 combines use of EGR with urea SCR and combines
the use of a diesel particulate filter with SCR for simultaneous
particulate and NOx control. Tests have shown such a system demonstrates
85% NOx and 90% particulate reduction.
US Patent No. 5,809,775 covers the use of a solid reagent system for
generating ammonia.
A pending patent covers conversion of urea to ammonia for injection into
diesel exhaust.
Emulsion Technology for NOx and particulates
The Company is offering for license its LOE-NOx TM diesel fuel water
emulsion technology and its enhanced emulsion technology which expands on the
use of emulsion to carry urea or ammonia based reagents. These technologies
provide low cost NOx reduction of 15-30% for diesel engines.
US Patent No.'s 5,404,841, 5584,694, and 5,535,708 cover emulsions
containing NOx reduction reagents where the water reduces peak flame
temperature and protects the reagent.
US Patent No. 5,809,774 provides a means to emulsify urea solution with
diesel fuel at a dispensing pump and separate it "on board" a vehicle so
that the urea can be separately injected into exhaust gas. This avoids
loading urea as a second operation.
Platinum Plus for Gasoline
The Company has developed a platinum/rhodium based gasoline fuel additive
that has been demonstrated to rejuvenate the performance of aged catalytic
converters. This product was previously test marketed in Europe and the Company
is seeking a partner to complete development and commercialization of this
product. Use of such a product in the U.S. will require registration with the US
EPA under fuel additive registration requirements. To date the Company has not
found a partner willing to fund the development and registration testing in the
U.S.
CDT-4 Microorganism for Desulfurization of Diesel Fuel
The Company has isolated and conducted limited testing on a microorganism
that has demonstrated the ability to reduce diesel fuel sulfur content by up to
40%. The Company has filed a patent application on this organism and is seeking
partners to fund further development and testing.
Health Effects and Registration of Additives
Metallic additives have come under scrutiny for their possible effects on
health. The Company registered its platinum additive in 1997 in both the US and
United Kingdom. The platinum - cerium bimetallic additive required further
registration in the US and that process involved a 1,000-hour engine test and
extensive emission measurements and analysis. This registration was completed in
1999 and issued in December 1999.
Germany, Austria and Switzerland have set up a protocol for approving
diesel particulate filters and additive systems used with them. This
registration process requires further engine testing which the Company has
arranged to do and expects to be complete in the first half of 2000. The Company
completed selected tests under the VERT protocol in 1998 which demonstrated that
the use of the platinum-cerium additive at dose rates of 10 ppm or less did not
give rise to an increase in ultra fine particulates, whereas all metallic
additives tested under the protocol to that date typically used dose rates of 30
ppm to 100 ppm and gave rise to an order of magnitude increase in ultra fine
particulates.
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Engine tests show that the amount of platinum emitted from the use of
Platinum Plus is roughly equivalent to platinum attrition from automotive
catalytic converters.
In December 1996 the United Kingdom Ministry of Health's Committee on
Toxicity reviewed the product and all the data submitted by the Company and in
its response stated "The Committee is satisfied that the platinum emission from
vehicles would not be in an allergenic form and that the concentrations are well
below those known to cause human toxicity." In 1997 Radian Associates reviewed
the Company's data and the literature on platinum health effects and concluded
"the use of Clean Diesel Technologies' platinum containing diesel fuel additive
is not expected to have an adverse health effect on the population under the
condition reviewed." Radian also concluded that emissions of platinum from the
additive were 2,000 to 2,000,000 times below the minimum workplace standard
levels.
Sources of Supply
The Company has outsourcing arrangements with two companies in the
precious metal refining industry and may make arrangements with others to meet
its platinum requirements. The Company has made the product itself in the past
but considers outsourcing to a precious metal refinery to be more cost
effective. The Company has established several sources of cerium to use in its
bimetallic diesel additive.
Research and Development
During 1999 the Company employed 5 individuals, including two executive
officers, in engineering and product development. In February 2000 two employees
were transferred to RJM as part of the ARIS 2000 license transaction (See
Footnote 9, "Subsequent Events" to the accompanying Financial Statements).
During the years ended December 31, 1999, 1998, and 1997, the Company's research
and development expenses exclusive of patent costs totaled approximately
$827,000, $1,009,000 and $1,985,000, respectively. The Company expenses all
development costs as incurred.
Protection of Proprietary Information
The Company holds the rights to a number of patents and pending patent
applications. There can be no assurance that pending patent applications will be
approved or that the issued patents or pending applications will not be
challenged or circumvented by competitors. Certain critical technology
incorporated in the Company's products is protected by trademark and trade
secret laws and confidentiality and licensing agreements. There can be no
assurance that such protection will prove adequate or that the Company will have
adequate remedies for disclosure of its trade secrets or violations of its
intellectual property rights.
Insurance
The Company maintains coverage for the customary risks inherent in its
operations. Although the Company believes its insurance policies to be adequate
in the amount and coverage for its current operations, no assurance can be given
that this coverage will, in fact, be or continue to be available in adequate
amounts or at a reasonable cost or that such insurance will be adequate to cover
any future claims against the Company.
Employees
The Company has seven full-time employees. In addition, one executive
officer of Fuel Tech provides management, and legal services for the Company
pursuant to a Management and Services Agreement between Fuel Tech and the
Company on an as-needed basis. The Company also retains two outside technical
consultants on specific projects related to platinum, engines, and NOx
reduction, and retains several outside marketing agents.
The Company enjoys good relations with its employees and is not a party
to any labor management agreements.
Risk Factors of the Business
Investors in the Company should be mindful of the following risk factors
relative to the Company's business:
Liquidity - Going Concern
Prior to December 1999, the Company was a development stage business and
has incurred losses since inception totaling $16,278,000 (excluding the effect
of non-cash preferred dividends and the one-time imputed non-cash preferred
dividend). At the date of this report, the Company has cash resources estimated
to be sufficient for its needs only through the third quarter of 2000. See the
text below under the captions "Liquidity and Sources of Capital" in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
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Operations," and "Report of Independent Auditors" in Item 8, "Financial
Statements." Accordingly, at December 31, 1999, there is substantial doubt as to
the Company's ability to continue as a going concern.
Competition
Competition in the diesel fuel additive market is from other additive
suppliers, that produce other metallic additives. The Company competes on the
basis of effectiveness, price, proprietary technology, and ease of use of the
PFCs.
Competition in the NOx control market is from other suppliers of
reagent-based post-combustion NOx control systems including large,
well-established catalyst and engine manufacturing companies. The Company has
proprietary technology in this area.
Need for Registration
The Company needs to comply with registration requirements for each
territory in which it sells its products. The Company received its registration
from the US EPA under Tier 1 of 211(b) registration for its platinum - cerium
additive in December 1999. It can sell the product with its current registration
status that provides for pass through rights for the additive companies to use
the product without further registration. However, there are provisions in the
Act under which the US EPA could require further testing. The US EPA has not
exercised these powers yet for any additive. In Europe the Company is
registering in Germany and Switzerland. This registration requires testing which
the Company expects to complete in the second quarter of 2000. Further testing
could be needed in these or other territories.
Continuing Operating Losses
The Company has had minimal revenues through December 31, 1999. The
Company expects to continue to incur operating losses at least through 2000.
There can be no assurance that the Company will achieve or sustain significant
revenues or profitability in the future. See Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," elsewhere
herein.
No Assurances of Additional Funding
The Company is seeking additional funding in the form of a private
offering of additional shares of the Company's equity securities. Any offering
of such securities may result in dilution to the stockholders of the Company.
The ability of the Company to consummate a financing will depend on the status
of the Company's marketing programs and field trials, as well as conditions then
prevailing in the relevant capital markets. There can be no assurance that such
funding will be available when needed, or on terms acceptable to the Company. In
the event that the Company is unable to raise additional funds, the Company may
be required to delay, scale back, or severely curtail its operations or
otherwise impede its ongoing commercialization, which could have a material
adverse effect on the Company's business, operating results, financial condition
and long-term prospects. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," elsewhere herein.
Possible Volatility of Stock Price
There has been significant volatility in the market prices of publicly
traded shares of emerging growth technology companies. Factors such as
announcements of technical developments, establishment of strategic alliances,
changes in governmental regulation, and developments in patent or proprietary
rights may have a significant effect on the market price of the Company's Common
Stock.
Relationship with Fuel Tech; Conflicts of Interest
Directors and officers of Fuel Tech and its subsidiaries who are also
directors and officers of the Company, and Fuel Tech as the Company's largest
stockholder, are in positions involving the possibility of conflicts of interest
with respect to transactions concerning the Company. The Company currently has
one director independent of Fuel Tech. See Item 13, "Certain Relationships and
Related Transactions" elsewhere herein.
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Uncertainty of Market Acceptance
The commercial success of the Company's products will depend upon
acceptance by the fuel additive, oil, and engine industries, and acceptance by
governmental regulatory bodies. This market acceptance will in turn depend upon
competitive developments and the Company's ability to demonstrate the efficacy,
cost effectiveness, safety, and ease of use of the PFCs and NOx control products
of the Company. The failure by the Company to receive market acceptance for the
PFCs and NOx control products would have an adverse effect on the Company's
business, operating results and financial condition. See "Products and Markets"
in Item 1, "Business," above.
No Assurance of Protection of Patents and Proprietary Rights
The Company holds licenses to a number of patents, holds certain patents,
and has patent applications pending. There can be no assurance that pending
patent applications will be approved or that the issued patents or pending
applications will not be challenged or circumvented by competitors. Certain
critical technology incorporated in the Company's products is protected by
trademark and trade secret laws and confidentiality and licensing agreements.
There can be no assurance that such protection will prove adequate or that the
Company will have adequate remedies for disclosure of its trade secrets or
violations of its intellectual property rights. See "Protection of Proprietary
Information" in Item 1, "Business."
Platinum Price
The cost of platinum may have a direct impact on the future pricing and
profitability of the PFCs. Although the Company intends to minimize this risk
through various purchasing and hedging strategies, there can be no assurance
that the Company will be able to do so. A significant prolonged increase in the
price of platinum could have a material adverse effect on the Company's
business, operating results and financial condition.
Dependence on Attracting and Retaining Personnel
The success of the Company will depend, in large part, on the Company's
ability to retain current key personnel, attract and retain additional qualified
management, scientific, and manufacturing personnel and to develop and maintain
relationships with research institutions and other outside consultants. The loss
of key personnel or the inability of the Company to hire or retain qualified
personnel, or the failure to assimilate effectively such personnel could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Employees" in Item 1, "Business."
No Dividends
The Company has to date not paid dividends on its Common Stock and does
not intend to pay any dividends to its common stockholders in the foreseeable
future. The Company currently intends to reinvest earnings, if any, in the
development and expansion of its business. Furthermore, while the Company does
not have an intention to pay dividends, its ability to pay any dividends would
be restricted by the dividend requirements of its Series A Convertible Preferred
Stock. See Item 5, "Market for Registrant's Common Equity and Related
Stockholder Matters."
Item 2. Properties
Facilities
The Company has leased for administrative purposes 2,900 square feet of
office space at 300 Atlantic Street, Stamford, Connecticut. The original
sublease was effective from February 1, 1996, through February 28, 1999, and had
an annual base rent of $65,250. In January 1999, the Company signed a lease
extension for the period March 1, 1999, through February 28, 2002, with the
possibility of early termination. The annual base rent under the lease extension
is $81,200.
Patents and Technology Assignments
The Company's technology is comprised of patents, patent applications,
trade or service marks, data, and know-how. This technology was acquired by
assignment from Fuel Tech or developed internally. The assignment agreement
provides for running royalties of 2.5% of gross revenues derived from the sale
of the PFCs, commencing in 1998 and terminating in 2008. The Company may at any
time terminate this royalty obligation by payment to Fuel Tech of amounts in
2000 of $9.8 million and declining annually to $1.1 million in 2008. The Company
as owner maintains the technology at its expense.
During 1999, the Company filed 1 additional US patent application and 14
international patent applications. The Company now has a total of 20 US patents
10
<PAGE>
and 59 international patents. There are currently 12 US patent applications
pending and 68 international applications pending. These patents and patent
applications cover the means of controlling the four principal emissions from
diesel engines (NOx, PM, CO, and HC).
Item 3. Legal Proceedings
The Company is not involved in any legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1999, no matters were submitted to a vote of
the Company's security holders.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Common Stock
The Company's shares are traded in the US in the over-the-counter market.
Reports of transactions of the Company's shares are available on the OTC
Electronic Bulletin Board (Symbol CDTI). At March 8, 2000, based on information
from the Company's transfer agent, there are 125 registered holders and
approximately 600 beneficial holders of Common Stock.
No dividends have been paid on the Company's Common Stock and the Company
does not intend to pay dividends on these shares in the foreseeable future.
Furthermore, while the Company does not have an intention to pay dividends, its
ability to pay any dividends would be restricted by the dividend requirements of
the Series A Convertible Preferred Stock (the "Series A Preferred Stock").
Stock price date: High Low
---------------- ---- ---
1st Quarter 1998.......................... 3 1/2 1 3/8
2nd Quarter 1998.......................... 2 5/8 1 5/16
3rd Quarter 1998.......................... 2 9/16
4th Quarter 1998.......................... 1 1/2 5/8
1st Quarter 1999.......................... 1 3/32 5/8
2nd Quarter 1999.......................... 15/16 11/16
3rd Quarter 1999.......................... 4 1/8 7/8
4th Quarter 1999.......................... 3 7/8 1 1/4
Sales and Uses of Unregistered Securities During the Period
Pursuant to a Regulation S exemption from registration under the
Securities Act of 1933 with respect to an offshore placement and a ss.4 (2)
private placement exemption under the Securities Act of 1933 with respect to an
exchange of the Company's notes with Platinum Plus, Inc., the Company sold or
exchanged effective August 16, 1999 through September 27, 1999, 3,500 shares of
its Series A Convertible Preferred Stock. The price and liquidation value of the
Series A Preferred Stock was $500 per share. Each share of Series A Preferred
Stock is convertible into 333.33 shares of the Company's Common Stock and pays
dividends, in cash, of 9% or, in kind, of additional shares of Series A
Preferred Stock, of 11% of the liquidation value. The directors have elected to
pay dividends in kind. The proceeds of the Series A Preferred Stock issuance of
approximately $1.75 million will be used for general corporate purposes of the
Company. There are, as of the date of this report, 33 beneficial holders of the
Series A Preferred Stock. See also the text under the caption "Liquidity and
Sources of Capital" in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" below. Additional information
relating to the terms and conditions of the Series A Preferred Stock is
contained in the Company's Form 10-Q for the quarter ending September 30, 1999,
and is incorporated by reference herein.
11
<PAGE>
Item 6. Selected Financial Data
The Company was incorporated on January 19, 1994, as a wholly owned
subsidiary of Fuel Tech. Effective December 12, 1995, Fuel Tech completed a
Rights Offering of the Company's Common Stock, with Fuel Tech retaining a 27.6%
ownership interest in the Company. In 1999 and 1998 the Company obtained $1.75
million and $3.2 million of proceeds respectively, through private placement
sales of shares of its Series A Convertible Preferred Stock (the "Series A
Preferred Stock"). As a participant in these financings, Fuel Tech owns 2,235
shares of the Company's Series A Preferred Stock, and along with its
approximately 689,000 shares of the Company's Common Stock, has an approximate
21.8% interest in the Company, on a fully converted basis, at December 31, 1999.
As discussed elsewhere herein, prior to December 1999, the Company was a
development stage business. Selected financial data of the Company for the years
ended December 31 are as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------------------
1999 1998 1997 1996 1995
------ -------- ------ ------ ------
STATEMENTS OF OPERATIONS DATA (in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Sales $ 142 $ 46 $ 199 $ -- $ --
Costs and expenses:
Cost of sales 81 29 132 -- --
General and administrative 1,585 1,515 1,730 1,842 963
Research and development 827 1,009 1,985 1,747 796
Patent filing and maintenance 134 156 237 223 199
------ ------ ------ ------ ------
Loss from operations 2,485 2,663 3,885 3,812 1,958
Interest (income) expense, net (44) 57 (121) (323) 66
Cost of withdrawn Rights Offering -- 264 -- -- --
------ ------ ------ ------ ------
Net loss before preferred dividends 2,441 2,984 3,764 3,489 2,024
Preferred Stock Dividend (non-cash) 393 -- -- -- --
One-time imputed non-cash preferred dividend 1,750 -- -- -- --
------ ------ ------ ------ ------
Net loss attributable to common $4,584 $2,984 $3,764 $3,489 $2,024
stockholders ====== ====== ====== ====== ======
Basic and diluted loss per common share $ 1.77 $ 1.20 $ 1.50 $ 1.40 $ 0.81
Weighted-average shares outstanding 2,594 2,517 2,517 2,500 2,500
Cash dividends paid $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
December 31,
-------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
BALANCE SHEET DATA (in thousands)
Current assets $1,311 $1,940 $1,682 $5,595 $8,882
Total assets 1,346 1,985 1,750 5,677 8,882
Current liabilities 690 686 894 1,486 487
Long-term liabilities -- -- 395 -- 745
Working capital 621 1,254 788 4,109 8,395
Stockholders' equity 656 1,299 461 4,191 7,650
</TABLE>
12
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In prior years, the Company was a development stage enterprise and its
efforts were devoted to the research, development, and commercialization of
platinum fuel catalysts and nitrogen oxide reduction technologies to reduce
emissions from diesel engines. During 1999, the Company received its US EPA
registration for its platinum - cerium product and completed its first
commercial sales, accordingly, in the opinion of management the Company is no
longer a development stage enterprise.
Results of Operations
1999 Versus 1998
Sales and cost of sales were $142,000 and $81,000, respectively, in 1999
versus $46,000 and $29,000, respectively, in 1998. The 1999 sales relate to
sales of pre-production commercial units of the Company's Advanced Reagent
Injection System, the ARIS 2000, to several engine manufacturers, catalyst
companies, and industrial end-users as well as fleet trials of the Company's
platinum - cerium additive.
The Company has received its US EPA registration of its platinum-cerium
additive. Field trials of the platinum-cerium additive started in the first
quarter of 1999 and are continuing. Sales of the platinum - cerium additive
totaled $34,000 in 1999. Based on trials that were completed in 1999, commercial
revenues from sales of the Company's Platinum Plus additives are initially
expected from fleets and aftermarket products and in later years from engine
manufacturers for inclusion with an "onboard dosing" system on new vehicles.
The Company identified a market opportunity for urea selective catalytic
reduction (SCR) systems for use with stationary diesel engines primarily for
power generation. The ARIS 2000 is a single fluid injection and metering system
complete with an electronic control unit that can be integrated with engine
electronic and diagnostic systems. The Company has completed development of the
ARIS 2000 system for stationary diesel engines and sold initial units to major
engine manufacturers for evaluation purposes. Total sales of the ARIS 2000 in
1999 were $108,000. The Company believes that the ARIS 2000 NOx reduction system
has applications for both stationary engines and mobile engines. While the ARIS
2000 for stationary use has completed development and is now being sold
commercially, the ARIS system for mobile applications needs further development
from the present prototype stage. The Company believes that the ARIS 2000 system
can most effectively be commercialized through licensing a company or companies
with a related business in these markets. The Company has been actively seeking
to license this technology and on February 2, 2000, entered into an agreement to
license its patented ARIS 2000 stationary diesel technology for stationary
diesel, railroad and marine engines in North, Central and South America to the
RJM Corporation (See Footnote 9, "Subsequent Events" to the accompanying
Financial Statements).
General and administrative expenses increased slightly to $1,585,000 in
1999 from $1,515,000 in 1998. The increase is primarily the result of increased
marketing expense related to the commercialization of Platinum Plus. Research
and development expenses decreased to $827,000 in 1999 from $1,009,000 in 1998.
The continued reduction in 1999 is due to the shift in focus from research and
development to commercialization. Research and development expenses will
continue to decline in 2000 as a result of the RJM license deal, which
transferred two engineers to RJM.
Patent filing and maintenance expenses decreased to $134,000 in 1999
versus $156,000 in 1998. The decrease is due in part to the shift in emphasis
toward commercialization as noted above. Interest income increased slightly to
$46,000 in 1999 from $41,000 in 1998. Interest expense decreased to $2,000 in
1999 from $98,000 in 1998 due to interest expenses associated with the $1.4
million bridge loan notes (the "Bridge Loan") issued during 1998 and
subsequently converted (in 1998) into the Company's Series A Preferred Stock.
In 1999, the Company recorded $393,000 of in-kind preferred stock
dividends on its Series A Preferred Stock. In addition, a one-time imputed
non-cash dividend of $1.75 million resulting from the difference between the
conversion price of the Preferred Stock and the quoted market price of the
Company's common stock at the date of issuance, was recorded in the third
quarter of 1999. (See Footnote 2, "Significant Accounting Policies" to the
accompanying Financial Statements).
During 1998, the Company incurred approximately $264,000 in expenses
associated with an effort to secure additional funding in the form of a Rights
13
<PAGE>
Offering. The Company submitted a Registration Statement (Form S-1) to the
Securities and Exchange Commission in August 1998. The Registration Statement
was subsequently withdrawn on November 5, 1998, upon the Company receiving a
commitment for approximately $1.85 million, net of expenses, through a private
placement of shares of its Series A Preferred Stock. See "Liquidity and Sources
of Capital" below for further information.
1998 Versus 1997
Sales and Cost of sales were $46,000 and $29,000, respectively, in 1998
versus $199,000 and $132,000, respectively, in 1997. The 1998 sales related
primarily to sales of the Company's commercial prototype of the ARIS(TM) 2000
diesel NOx reduction system. The units were sold for testing and evaluation
purposes. The 1997 sales related to PFC products purchased by Holt Lloyd
International, Ltd. ("Holts"), pursuant to a September 1996 supply agreement. In
early 1997, Holts launched the Company's PFC products for use with Holts' fuel
additives in the after-treatment of fuel for both gasoline and diesel engines in
several European countries. As a result of Holts being acquired by Prestone
Products, Inc., a division of AlliedSignal in December 1997 and minimal sales
performance, the supply agreement was terminated. There were minimal sales of
the PFCs in 1998.
General and administrative expenses decreased to $1,515,000 in 1998 from
$1,730,000 in 1997. The decrease was primarily the result of measures taken by
the Company to reduce expenditures in order to conserve cash, pending securing
additional working capital and the success of its commercialization efforts.
Research and development expenses decreased to $1,009,000 in 1998 from
$1,985,000 in 1997. The significant reduction in 1998 was due in part to the
completion of a number of fundamental programs in 1997; the deferral of certain
field trials due to the Company's working capital position; and the Company's
expanded participation in collaborative and consortium-based programs with
potential customers and industrial partners for which the Company funds only a
portion of the program cost.
Patent filing and maintenance expenses decreased to $156,000 in 1998
versus $237,000 in 1997. The decrease is due in part to the shift in emphasis
toward commercialization. Additionally, expenses were higher in 1997 due to the
costs associated with new patent filings for the Company's NOx reduction
technology.
Interest income decreased to $41,000 in 1998 from $165,000 in 1997. The
decrease is the result of the Company's lower cash position. Interest expense
increased to $98,000 in 1998 from $44,000 in 1997 due to interest expenses
associated with the $1.4 million bridge loan notes (the "Bridge Loan") issued
during 1998 and subsequently converted into the Company's Series A Preferred
Stock. See "Liquidity and Sources of Capital" below for further information.
During 1998, the Company incurred approximately $264,000 in expenses
associated with an effort to secure additional funding in the form of a Rights
Offering. The Company submitted a Registration Statement (Form S-1) to the
Securities and Exchange Commission in August 1998. The Registration Statement
was subsequently withdrawn on November 5, 1998, upon the Company receiving a
commitment for approximately $1.85 million, net of expenses, through a private
placement of shares of its Series A Preferred Stock. See "Liquidity and Sources
of Capital" below for further information.
Liquidity and Sources of Capital
During 1999, the Company received its registration for its platinum -
cerium product and began commercial sales of the product. Prior to this time the
Company was a development stage enterprise. The Company has been primarily a
research & development company that has incurred losses since inception
aggregating $16,278,000 (excluding the effect of the preferred dividends and the
one-time non-cash imputed preferred dividend - see Footnote 2 "Significant
Accounting Policies" to the accompanying financial statements). The Company
expects to incur losses through the foreseeable future as it further pursues its
commercialization efforts. Although the Company started selling product in 1997,
sales to date have been minimal and the Company continues to be dependent upon
sources other than operations to finance its working capital requirements.
In December 1995, the Company raised approximately $10.5 million, net of
offering expenses and broker-dealer commissions through the 1995 Rights Offering
of its shares by Fuel Tech. The Company then repaid Fuel Tech approximately $2.3
million in inter-company loans. On February 17, 1998, Fuel Tech agreed to
provide the Company with up to $500,000 in order to fund its cash requirements
until such time as the Company obtained the long-term financing it was seeking.
On May 20, 1998, the $500,000 commitment was converted into a bridge loan (the
14
<PAGE>
"Bridge Loan"). The Bridge Loan stipulated an automatic conversion into shares
of Preferred Stock upon the conclusion of a public or private financing that
contributed a minimum of $1.75 million of additional net proceeds to the
Company. In mid-1998, the Company also received an additional $900,000 of
financing under the same Bridge Loan (having the same terms and conditions) from
outside investors. As more fully described below, in November 1998, the Bridge
Loan automatically converted into 2,800 shares of Preferred Stock.
In 1997, the Company repaid $250,000 of a $745,000 promissory demand note
with Fuel Tech and restructured the remaining amount into a $495,000 promissory
note (the "Term Note") with Platinum Plus, Inc. ("Platinum Plus"), a wholly
owned subsidiary of Fuel Tech. See below for further information concerning the
exchange of the Term Note for shares of the Company's Preferred Stock.
In November 1998, the Company obtained approximately $1.85 million in net
proceeds against the issuance of 3,753 shares of Preferred Stock through a
private placement. As the Company received net proceeds in excess of the $1.75
million minimum, and in accordance with the terms of the Bridge Loan agreement,
the $1.4 million Bridge Loan, mentioned above, converted into 2,800 shares of
Preferred Stock. Additionally, in an effort to retain its approximate 27%
interest in the Company (assuming conversion of the Preferred Stock into the
Company's Common Shares), Fuel Tech elected to exchange its $495,000 Term Note,
and $20,000 of associated accrued interest from its Bridge Loan and Term Note,
for 1,029 shares of Preferred Stock. As a result, Fuel Tech owned 2,029 shares
of the Company's Preferred Stock at December 31, 1998. These shares plus the
1999 quarterly dividends, if converted, along with its Common Stock ownership
would give Fuel Tech an approximate 21.8% interest in the Company on a fully
converted basis at December 31, 1999.
In August/September 1999, the Company received gross proceeds of $1.75
million, excluding expenses of $29,000, from private investors against the
issuance of an additional 3,500 shares of Preferred Stock. Therefore, the
Company had 11,082 shares of Preferred Stock issued and outstanding at December
31, 1999, versus 7,582 shares at December 31, 1998. As a result of the 1999
quarterly dividends, the Company had an additional 786 shares of Preferred Stock
issuable upon demand. At December 31, 1999, the Company had a total of 11,968
issuable shares of Preferred Stock which are convertible into approximately 4.0
million shares of the Company's Common Stock, ($0.05 par convertible at a rate
of 1:333.33).
The Company signed an agreement with the RJM Corporation on February 2,
2000 that licensed RJM to sell the ARIS 2000 NOx control system for all
stationary, marine, and locomotive applications in North, Central, and South
America. Under terms of the agreement CDT received an initial $360,000 license
and inventory payment and the opportunity to earn an additional $1,000,000 in
license revenue over the next 36 months based on the performance of the ARIS
2000. In addition to license revenue, CDT will earn a royalty on all future ARIS
2000 sales.
Effective as of October 28, 1994, Fuel Tech granted two licenses to the
Company for all patents and rights associated with its Platinum Fuel Catalyst
("PFC") technology. Effective November 24, 1997, the licenses were canceled and
Fuel Tech assigned to the Company all such patents and rights on terms
substantially similar to the licenses. In exchange for the assignment, the
Company will pay Fuel Tech a royalty of 2.5% of its annual gross revenue from
sales of the PFC's, commencing in 1998. The royalty obligation expires in 2008.
The Company may terminate the royalty obligation to Fuel Tech by payment of
$9,818,180 in 2000 and declining annually to $1,090,910 in 2008. The Company as
assignee and owner will maintain the technology at its own expense. To date no
royalties have been paid to Fuel Tech.
For the years ended 1999, 1998, and 1997, the Company used cash of
$2,518,000, $2,849,000, and $3,775,000 respectively, in operating activities.
At December 31, 1999, and December 31, 1998, the Company had cash and
cash equivalents of $892,000 and $1,663,000, respectively. The decrease in cash
and cash equivalents in 1999 was the result of the Company's use of its
resources to fund operations in 1999, partially offset by the funds raised in
the third quarter of 1999. Working capital decreased to $614,000 at December 31,
1999, from $1,254,000 at December 31, 1998. The Company anticipates incurring
additional losses through at least 2000 as it further pursues its
commercialization efforts.
As a result of the Company's recurring operating losses, the Company has
been unable to generate a positive cash flow. In management's opinion, the
Company's cash balance at December 31, 1999, together with the $360,000 license
15
<PAGE>
and inventory payment received from RJM in February 2000 (see Footnote 9,
"Subsequent Events" to the accompanying financial statements) will be sufficient
to fund the Company's operations through the third quarter of 2000. The Company
will require additional capital to fund its operations. Although the Company
believes that it will be successful in its capital-raising efforts, there is no
guarantee that it will be able to raise such funds on terms that will be
satisfactory to the Company. The Company will develop contingency plans in the
event future financing efforts are not successful. Such plans may include
reducing expenses and selling or licensing some of the Company's technologies.
Accordingly, at December 31, 1999, there is substantial doubt as to the
Company's ability to continue as a going concern. See "Liquidity Going Concern"
elsewhere herein for additional information.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
In the opinion of management, with the exception of exposure to
fluctuations in the cost of platinum, the Company is not subject to any
significant market risk exposure. See "Risk Factors of the Business -- Platinum
Price" in Item 1, "Business."
Impact of the Year 2000
In prior years, the Company discussed the nature and progress of its
plans to become Year 2000 ready. In late 1999, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
expensed insignificant amounts in 1999 in connection with remediating its
systems. The Company is not aware of any material problems resulting from Year
2000 issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its critical
computer applications and those of its suppliers and vendors throughout the year
2000 to ensure that any latent Year 2000 matters that may arise are addressed
promptly.
16
<PAGE>
Item 8. Financial Statements
Report of Independent Auditors
The Board of Directors and Stockholders
Clean Diesel Technologies, Inc.
We have audited the accompanying balance sheets of Clean Diesel
Technologies, Inc. as of December 31, 1999 and 1998, and the related statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Clean Diesel
Technologies, Inc. at December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
The accompanying financial statements have been prepared assuming Clean
Diesel Technologies, Inc. will continue as a going concern. As more fully
described in Footnote 1, the Company has incurred recurring operating losses and
its operations have not produced a positive cash flow. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans as to these matters are also described in Footnote 1. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classifications of liabilities that may result from the outcome of this
uncertainty.
ERNST & YOUNG LLP
Stamford, Connecticut
March 7, 2000
17
<PAGE>
<TABLE>
<CAPTION>
Clean Diesel Technologies, Inc.
Balance Sheets (in thousands except share data)
December 31,
--------------------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 892 $ 1,663
Accounts Receivable --
Inventories 46 219
321
Other current assets 52 58
-------- --------
Total current assets 1,311 1,940
Other assets 35 45
-------- --------
Total assets $ 1,346 $ 1,985
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 690 $ 686
-------- --------
Total current liabilities 690 686
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $0.05 per share,
authorized 85,000 and 90,000 shares,
no shares issued and outstanding -- --
Series A Convertible Preferred Stock, par value $0.05 per share,
$500 per share liquidation preference, authorized 15,000 and
10,000 shares, issued and outstanding 11,082 and 7,582 shares,
involuntary liquidation value $5,934,000 and $3,840,000.
Common Stock, par value $0.05 per share, authorized 1 1
15,000,000 shares, issued and outstanding 2,594,456
and 2,544,443 shares 130 127
Additional paid-in capital 18,946 15,008
Accumulated Deficit (18,421) (13,837)
-------- --------
Total stockholders' equity 656 1,299
-------- --------
Total liabilities and stockholders' equity $ 1,346 $ 1,985
======== ========
</TABLE>
See accompanying notes.
18
<PAGE>
Clean Diesel Technologies, Inc.
Statements of Operations (in thousands except per share data)
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Sales $ 142 $ 46 $ 199
Costs and expenses:
Cost of sales 81 29 132
General and administrative 1,585 1,515 1,730
Research and development 827 1,009 1,985
Patent filing and maintenance 134 156 237
------ ------ ------
Loss from operations 2,485 2,663 3,885
Interest income (46) (41) (165)
Interest expense 2 98 44
Cost of withdrawn Rights Offering -- 264 --
------ ------ ------
Net loss before preferred stock dividends 2,441 2,984 3,764
Preferred stock dividends (non-cash) 393 -- --
One-time imputed non-cash preferred dividend 1.750 -- --
------ ------ ------
Net loss attributable to Common Stockholders $4,584 $2,984 $3,764
====== ====== ======
Basic and diluted loss per
common share $ 1.77 $ 1.19 $ 1.50
====== ====== ======
Average number of common
shares outstanding 2,594 2,517 2,517
====== ====== ======
</TABLE>
See accompanying notes.
19
<PAGE>
Clean Diesel Technologies, Inc.
Statements of Changes in Stockholders' Equity (in thousands)
<TABLE>
<CAPTION>
Series A Convertible Total
Preferred Stock Common Stock Additional Stockholders'
------------------ ------------ Paid-In Accumulated Equity
Shares Amount Shares Amount Capital Deficit (Deficiency)
------ ------ ------ ------ ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
January 1, 1997 -- $-- 2,500 $125 $11,155 $ (7,089) $ 4,191
Net loss for year -- -- -- -- -- (3,764) (3,764)
Issuance of stock purchase warrnats -- -- -- -- 30 -- 30
Exercise of stock options -- -- 17 1 3 -- 4
---- --- ----- ---- ------- -------- -------
Balance at December 31, 1997 -- -- 2,517 126 11,188 (10,853) 461
Net loss for year -- -- -- -- -- (2,984) (2,984)
Issuance of Series A Preferred Stock 7.6 1 -- -- 3,790 -- 3,791
Deferred compensation -- -- 27 1 30 -- 31
---- --- ----- ---- ------- -------- -------
Balance at December 31, 1998 7.6 1 2,544 127 15,008 (13,837) 1,299
Net loss for year -- -- -- -- -- (2,441) (2,441)
Issuance of Series A Preferred Stock 3.5 -- -- -- 1,750 -- 1,750
Exercise Stock Options -- -- 12 1 4 -- 5
Conversion of Directors fees into
Common Stock -- -- 38 2 41 -- 43
One-time preferred Dividend -- -- -- -- 1,750 (1,750) --
Declared but not issued Preferred
Dividend -- -- -- -- 393 (393) --
---- --- ----- ---- ------- -------- -------
Balance at December 31, 1999 11.1 $ 1 2,594 $130 $18,946 $ 18,421 $ 656
==== === ===== ==== ======= ======== =======
</TABLE>
See accompanying notes.
20
<PAGE>
Clean Diesel Technologies, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------
1999 1998 1997
------- --------- --------
OPERATING ACTIVITIES (in thousands)
<S> <C> <C> <C>
Net loss before preferred dividends $(2,441) $(2,984) $(3,764)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation 18 26 24
Issuance of stock purchase warrants -- -- 30
Deferred compensation -- 31 --
Conversion of bridge loan and term note accrued
interest into preferred stock -- 20 --
Changes in operating assets and liabilities:
Account Receivable (46) -- --
Inventories (102) (14) (102)
Other current assets 6 180 (16)
Accounts payable and accrued expenses 47 (108) 53
------- ------- -------
Net cash used in operating activities (2,518) (2,849) (3,775)
------- ------- -------
FINANCING ACTIVITIES
Repayment of loan to Fuel-Tech N.V. -- -- (250)
Proceeds from exercise of stock options 5 -- 4
Proceeds from bridge loan -- 1,400 --
Proceeds from issuance of preferred stock 1,750 1,876 --
------- ------- -------
Net cash provided from (used in) financing activities 1,755 3,276 (246)
------- ------- -------
INVESTING ACTIVITIES
Sale of short-term investments -- -- 2,000
Purchase of fixed assets (8) (3) (10)
------- ------- -------
Net cash (used in) provided by investing activities (8) (3) 1,990
------- ------- -------
Net (decrease) increase in cash and
cash equivalents (771) 424 (2,031)
Cash and cash equivalents at beginning of period 1,663 1,239 3,270
------- ------- -------
Cash and cash equivalents at end of period $ 892 $ 1,663 $ 1,239
======= ======= =======
Cash payments for interest to Fuel-Tech N.V. $ -- $ 41 $ 44
NON-CASH ACTIVITIES
Preferred Dividend 393 -- --
One-time imputed non-cash preferred dividend 1,750 -- --
Stock Dividend to Directors 43 -- --
Issuance of stock purchase warrants -- -- 30
Conversion of bridge loan into Series A Convertible
Preferred Stock -- 1,400 --
Conversion of loan from Fuel-Tech N.V. into
Series A Convertible Preferred Stock -- 495 --
</TABLE>
See accompanying notes.
21
<PAGE>
Clean Diesel Technologies, Inc.
Notes to Financial Statements
1. Organization
Business
Clean Diesel Technologies, Inc. (the "Company") was incorporated in the
State of Delaware on January 19, 1994, as a wholly owned subsidiary of Fuel-Tech
N.V. ("Fuel Tech"). As more fully discussed in Footnote 4, effective December
12, 1995, Fuel Tech completed a Rights Offering of the Company's Common Stock,
and reduced its ownership in the Company's Common Stock to 27.6%.
The Company is a specialty chemical company supplying fuel additives and
proprietary systems that reduce harmful emissions from internal combustion
engines while improving fuel economy. Prior to December 1999 the Company was a
development stage enterprise devoted to research, development, and
commercialization of Platinum Fuel Catalysts (PFCs) and Nitrogen Oxide (NOx)
reduction technologies for diesel engines. During December 1999, the Company
received its US EPA registration for its platinum - cerium product and recorded
its first commercial sales. Accordingly, in the opinion of management, the
Company is no longer a development stage enterprise.
As more fully described elsewhere herein, the Company received net
proceeds of approximately $1.75 million in 1999 and $3.2 million in 1998 through
private placements of its Series A Convertible Preferred Stock to assist in the
pursuit of its commercialization efforts. The commercialization of the Company's
technologies will depend upon the success of field trials and governmental
regulations, including federal, state and foreign agencies. The accomplishment
of these objectives by the Company will require additional capital and there can
be no assurance that such capital will be available.
Going Concern
The financial statements have been prepared assuming that the Company
will continue as a going concern and do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
and the amount and classification of liabilities that may result from the
possible inability of the Company to continue as a going concern.
As a result of the Company's recurring operating losses ($16,278,000
since inception excluding non-cash preferred dividends and the one-time imputed
preferred dividend), the Company has been unable to generate a positive cash
flow. The Company will require additional capital in the future in order to fund
its operations. The Company's current cash position, coupled with expected
revenues and proceeds from the RJM license transaction (See Footnote 9,
"Subsequent Events" to the accompanying Financial Statements) will not be
sufficient to fund the Company's cash requirements. The Company is, however,
actively seeking additional financing through a private placement and/or joint
development agreements in order to fund its commercialization efforts. Without
any further funding or revenues from sales, demonstration programs, or license
fees, the Company expects to be able to fund operations through the third
quarter of 2000. Although the Company believes that it will be successful in its
capital-raising efforts, there is no guarantee that it will be able to raise
such funds on terms that will be satisfactory to the Company. The Company has
developed contingency plans in the event its financing efforts are not
successful. Such plans include reducing expenses and selling or licensing the
Company's technologies. Accordingly, at December 31, 1999, there is substantial
doubt as to the Company's ability to continue as a going concern.
2. Significant Accounting Policies
Use of Estimates
The preparation of the Financial Statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the Financial Statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents and Financial Instruments
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. At December 31,
1999, substantially all of the Company's cash and cash equivalents were on
deposit with one financial institution.
22
<PAGE>
Clean Diesel Technologies, Inc.
Notes to Financial Statements (Continued)
All financial instruments are reflected in the accompanying balance
sheets at amounts that approximate fair market value.
Inventories
Inventories are stated at the lower of cost or market and consist of
finished product. Cost is determined using the first-in, first-out (FIFO)
method.
Revenue Recognition
The Company recognizes revenue upon shipment.
Research and Development Costs
Costs relating to the research, development, and testing of products are
charged to operations as they are incurred. These costs include test program
costs, salaries and related costs, consultancy fees, materials, and certain
testing equipment. The cost of patent filings and maintenance are also charged
to operations as they are incurred. Included in accrued expenses at December 31,
1998, are liabilities for research and development expenses owing to Ricardo
Consulting Engineers Ltd., Southwest Research Institute and Johnson Matthey of
$57,000, $44,000 and $32,000, respectively.
Cost of Withdrawn Rights Offering
As a result of the aforementioned $3.2 million financing in November
1998, the Company canceled its pending $2 million Rights Offering. The Statement
of Operations for the year ended December 31, 1998 includes approximately
$264,000 of costs associated with such Rights Offering.
Stock-Based Compensation
The Company accounts for stock option grants in accordance with
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees. Under the Company's current plan, options may be granted at not less
than the fair market value on the date of grant and therefore no compensation
expense is recognized for the stock options granted to employees. The Company
has adopted the disclosure provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation.
Basic and Diluted Loss Per Common Share
Basic and diluted earnings per share are calculated in accordance with
SFAS No. 128, Earnings Per Share.
During the third quarter of 1999 the Company issued 3,500 shares of
Preferred Stock in exchange for $1.75 million, with each share being immediately
convertible into 333.33 shares of the Company's Common Stock. The Company was
actively marketing its Preferred Stock at a premium (i.e., the $1.50 conversion
price was above the market price at the time of the solicitation) and did in
fact receive commitments from European investors at a time when the stock price
was below $1.50 per share. Subsequent to receiving the commitments but prior to
receiving the funds, the price of the Company's stock increased to over $3 per
share. In connection therewith, as required by the Financial Accounting
Standards Board's Emerging Issues Task Force Statement 98-5 "Accounting for
Convertible Ratios," the Company is required to record a one-time imputed
non-cash dividend of approximately $1.75 million resulting from the difference
between the conversion price and the quoted market price of the Company's Common
Stock as of the date of issuance. The $1.75 million one-time imputed non-cash
dividend has been recognized in the computation of the loss applicable to Common
Stockholders as a charge against the accumulated deficit with a corresponding
increase in additional paid-in capital. There is no related dividend
distribution to Series A Preferred Stockholders. The potentially dilutive Series
A Convertible Preferred Stock Securities were not included in the diluted loss
per share applicable to Common Stockholders as the effect would be
anti-dilutive.
23
<PAGE>
Clean Diesel Technologies, Inc.
Notes to Financial Statements (Continued)
3. Taxation
The Company accounts for income taxes in accordance with the "liability
method." Under this method, income tax provisions are based on income taxes
currently payable, and those deferred because of temporary differences between
the financial statement and tax basis of assets and liabilities.
At December 31, 1999 and 1998, the Company had tax losses available for
offset against future years earnings of approximately $14.4 million and $12.5
million, respectively. Temporary differences were insignificant as of such
dates. Approximately $0.9 million, $2.0 million, $3.2 million, $3.4 million,
$3.0 and $1.9 million of the tax loss carryforwards expire in 2009, 2010, 2011,
2012, 2018, and 2019, respectively. The Company has not recognized any benefit
from the aforementioned tax loss carryforwards. The Taxpayer Relief Act of 1997
modified the net operating loss provisions so that losses arising for tax years
beginning after the effective date of the Act (August 5, 1997) would be eligible
for carryforward for twenty years. Existing losses would still be subject to a
fifteen-year carryforward period.
Under the provisions of the United States Tax Reform Act of 1986,
utilization of the Company's US federal tax loss carryforwards (for the period
prior to December 12, 1995) may be limited as a result of the ownership change
in excess of 50% related to the 1995 Fuel Tech Rights Offering (see
"Stockholders' Equity" below for further information).
4. Stockholders' Equity
On December 12, 1995, Fuel Tech completed a Rights Offering to its
existing shareholders of 72.4% of the Company's Common Stock, retaining 27.6% of
the Common Stock outstanding. Two million of the 2.5 million Company shares held
by Fuel Tech were offered in the 1995 Rights Offering. Approximately 1.8 million
Company shares were purchased in the offering, which raised net proceeds of
approximately $10.5 million, all of which was contributed by Fuel Tech to the
Company.
During 1999 and 1998, the Company received proceeds of $1.75 million and
$1.85 million through private placements of 3,500 and 3,753 shares of its Series
A Preferred Stock, respectively. In addition, in 1998 $1.4 million of bridge
loans and $0.5 million of term loans due to Fuel Tech were converted into 2,800
and 1,029 shares of Series A Preferred Stock, respectively. During 1999 $393,000
(786 shares) of dividends were declared but unissued on the Series A Preferred
Stock. At December 31, 1999, the Company has 11,082 shares of Series A Preferred
Stock issued and outstanding.
Each share of the Company's Series A Preferred Stock is convertible into
333.33 shares of the Company's Common Stock, which is equivalent to $1.50 per
Common Share. Assuming full conversion of the Series A Preferred Stock, the
Company would have approximately 6.6 million shares of Common Stock outstanding,
of which Fuel Tech would own approximately 1.43 million shares, or a 21.8%
interest in the Company.
Holders of the Company's Series A Preferred Stock are entitled to
receive, when, as, and if declared by the Board of Directors of the Company, out
of funds of the Company legally available therefor, cash dividends at the annual
rate of 9%. However, in lieu of making dividends in cash, the Company may elect
to pay cumulative dividends in kind at the annual rate of 11%. Cash dividends
and dividends in kind are each deemed "Preferred Dividends." Dividends payable
to the holders of the Series A Preferred Stock are payable quarterly in arrears.
It is presently anticipated that the Company will pay dividends on these shares
in additional shares of Series A Preferred Stock, and that any earnings that the
Company may realize in the foreseeable future will be retained to finance the
expansion of the Company. As of December 31, 1999, earned but undeclared
dividends on the Series A Preferred Stock approximated $163,000.
The Company can force the holders of the Series A Preferred Stock to
convert their shares, in whole or in part, into Common Stock at any time on, or
after, the date that the average Closing Price (as defined in the Certificate of
Designation) of the Common Stock equals or exceeds $4.50 for 20 consecutive
trading days. Such conversion may, at the election of the holders of 60% of the
issued and outstanding shares of the Company's Series A Preferred Stock, be
24
<PAGE>
Clean Diesel Technologies, Inc.
Notes to Financial Statements (Continued)
scheduled to occur on a pro-rata basis quarterly over 18 months. The Series A
Preferred Stock shall be automatically converted into Common Stock should the
Company consummate a public offering of its Common Stock in excess of certain
prescribed amounts. In the event of such mandatory conversion, accrued and
unpaid dividends will also convert into Common Stock, on the same terms as the
underlying shares of Series A Preferred Stock.
On December 31, 1998, the Company issued 27,777 shares of Common Stock to
an executive in lieu of approximately $31,000 of deferred compensation. The
share price used represented the average of the Company's high and low trading
price on the quarter ending price.
On February 24, 1999, the Company issued 38,000 shares of Common Stock to
its Board of Directors in lieu of approximately $43,000 of Director's fees
pertaining to their services for the year ended December 31, 1998. The share
price used represented the average of the Company's 1999 quarter end, high and
low trading prices. Such Director's fees had been accrued and charged to expense
during 1998.
5. Stock Options and Warrants
The Company maintains a stock award plan, the 1994 Incentive Plan (the
"Plan"). Under the Plan, awards may be granted to participants in the form of
non-qualified stock options, stock appreciation rights, restricted stock,
performance awards, bonuses, or other forms of share-based or non-share-based
awards, or combinations thereof. The Company grants awards at fair market value
on the date of grant with expiration dates typically ranging from seven to ten
years. Participants in the Plan may be such of the Company's directors,
officers, employees, consultants, and advisers (except consultants or advisers
in capital-raising transactions) as the directors determine are key to the
success of the Company's business. The Company includes 50%-owned subsidiaries
or affiliates. In 1996, stockholders amended the Plan to increase from 10% to 12
1/2% the percentage of outstanding Common Shares of the Company used to
determine the maximum number of awards to participants. In 1997, the percentage
was further increased from 12 1/2% to 17 1/2%. Also, in 1999 the stockholders
amended the Plan to extend the 17 1/2 % from not only the issued and outstanding
Common Shares but also the Common Shares into which issued and outstanding
convertible securities of the Company may be converted. In general, the policy
of the Board was to grant stock options vesting in three equal portions on the
first through third anniversaries of the grant date for grants prior to 1997,
and in equal portions on the grant date and the first and second anniversaries
of the grant date for grants awarded after 1997.
If compensation expense for the Company's plan had been determined based
on the fair value at the grant dates for awards under its plan, consistent with
the method described in SFAS No. 123, the Company's net loss and basic and
diluted loss per common share would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ---------- -------
<S> <C> <C> <C>
Net loss attributable to Common Stockholders (000's):
As reported $4,584 $2,984 $3,764
Pro forma 4,678 3,157 4,040
Basic and diluted loss per common share:
As reported $ 1.77 $ 1.19 $ 1.50
Pro forma 1.80 1.25 1.59
</TABLE>
In accordance with the provisions of SFAS No. 123, for purposes of the
pro forma disclosures the estimated fair value of the options is amortized over
the option vesting period. The application of the pro forma disclosures
presented above are not representative of the effects SFAS No. 123 may have on
operating results and earnings (loss) per share in future years due to the
timing of stock option grants and considering that options vest over a period of
two years.
25
<PAGE>
Clean Diesel Technologies, Inc.
Notes to Financial Statements (Continued)
The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option pricing models require the input
of highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
The fair value of each option grant, for pro forma disclosure purposes,
was estimated on the date of grant using the modified Black-Scholes option
pricing model with the following weighted-average assumptions:
1999 1998 1997
------- ------- ------
Expected dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate 5.72% 4.69% 5.72%
Expected volatility 104.9% 92.4% 61.3%
Expected life of option 4 years 4 years 4 years
The following table presents a summary of the Company's stock option
activity and related information for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------------------------------------
Options Weighted-Average Options Weighted-Average Options Weighted-Average
(000's) Exercise Price (000's) Exercise Price (000's) Exercise Price
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year 440 $3.41 365 $3.77 287 $3.25
Granted 335 1.16 78 1.75 115 4.61
Exercised (12) .40 -- -- (17) 0.20
Forfeited (3) .90 (3) 2.00 (20) 4.52
-------------------------------------------------------------------------------------
Outstanding, end
of year 760 $2.48 440 $3.41 365 $3.77
Exercisable, end =====================================================================================
of year 537 $2.98 340 $3.47 259 $3.41
Weighted-average
fair value of
options granted
during the year $ .69 $1.02 $2.18
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------- ----------------------------------
Weighted-Average
Range of Number of Remaining Weighted-Average Number of Weighted-Average
Exercise Prices Options Contractual Life Exercise Price Options Exercise Price
- -------------------------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
$.20 - $2.50 503,333 7.84 $1.29 280,000 $1.31
2.51 - 4.63 192,500 6.53 4.17 192,500 4.17
4.64 - 6.82 64,450 6.03 6.70 64,450 6.70
- -------------------------------------------------------------------------------------------------------------
$.20 - $6.82 760,283 7.35 $2.48 536,950 $2.98
</TABLE>
26
<PAGE>
Clean Diesel Technologies, Inc.
Notes to Financial Statements (Continued)
Pursuant to a financial consulting agreement, an investment bank has the
right to purchase warrants covering 50,000 shares of the Company's Common Stock,
with an exercise price of $6.50 per share (an 18% premium over market price on
the date of issue). The warrants expire on March 1, 2001.
In March 1997, in consideration of his undertaking to assist the Company
in obtaining sources of permanent financing, the Company granted a director of
the Company a warrant to purchase 25,000 shares of the Company's Common Stock
for $10.00 per share which exceeded the fair market value of the Company's
Common Stock at the date of grant. In June 1999, in consideration of his
undertaking to assist the Company in obtaining sources of permanent financing
the Company granted warrants to two directors for 58,333 and 29,167 shares at
$1.50 per share which exceeded the fair market value of the Company's Common
Stock at the date of grant.
6. Commitments
The Company is obligated under a sublease agreement for its principal
office. In January 1999, the Company signed an extension to its original
sublease agreement, which runs from March 1, 1999, through February 28, 2002,
unless it is terminated sooner pursuant to the terms of the sublease. The
Company's minimum lease payments are as follows: 2000--$81,200, 2001--$81,200,
and 2002--$13,533. For the years ended December 31, 1999, 1998, and 1997, rental
expense approximated $82,000, $81,000, and $93,000, respectively.
Effective October 28, 1994, Fuel Tech granted two licenses to the
Company for all patents and rights associated with its Platinum Fuel Catalyst
technology. Effective November 24, 1997, the licenses were canceled and Fuel
Tech assigned to the Company all such patents and rights on terms substantially
similar to the licenses. In exchange for the assignment, the Company will pay
Fuel Tech a royalty of 2.5% of its annual gross revenue from sales of the
Platinum Fuel Catalysts commencing in 1998. The royalty obligation expires in
2008. The Company may terminate the royalty obligation to Fuel Tech by payment
of $9,818,180 million in 2000 and declining annually to $1,090,910 in 2008. The
Company as assignee and owner will maintain the technology at its own expense.
Royalties payable to Fuel Tech at December 31, 1999 were not significant.
7. Related Party Transactions
On July 1, 1995, the Company entered into a $745,000 promissory demand
note (the "Demand Note") with Fuel Tech bearing an interest rate of 8% per
annum. In the first quarter of 1997, the Company repaid $250,000 of this note.
Throughout the life of the note, the Company made monthly interest payments on
the unpaid balance. Interest at a rate of 8% per annum was payable on the unpaid
balance on each principal payment date. As discussed in Footnote 4, in November
1998, Fuel Tech converted such note, along with the associated accrued interest
from such note and its Bridge Loan, into 1,029 shares of the Company's Series A
Preferred Stock.
During 1998, Fuel Tech executed a $500,000 Bridge Loan to the Company. On
November 11, 1998, as more fully described in Footnote 4, and pursuant to the
terms of the Bridge Loan, the entire $1.4 million Bridge Loan, inclusive of Fuel
Tech's portion, was converted into 2,800 shares of the Company's Series A
Preferred Stock.
On August 3, 1995, the Company signed a Management and Services Agreement
with Fuel Tech. According to the agreement, the Company reimburses Fuel Tech for
management, services, and administrative expenses incurred on behalf of the
Company. Additionally, Fuel Tech charged the Company a fee equivalent to an
additional 10% of such costs. In June 1996, the Company renegotiated this
agreement. Under the new agreement, the Company agreed to pay Fuel Tech a fee
equal to an additional 3-10% of the costs paid on the Company's behalf,
dependent upon the nature of the costs incurred. The Company shared facilities
and certain other resources with Fuel Tech and costs were allocated between the
companies based on usage. Certain of Fuel Tech's officers and directors serve as
officers and directors of the Company, and the Company received management and
administrative support from Fuel Tech's staff. The Financial Statements include
allocations from Fuel Tech of certain management and administrative costs, which
approximate $106,000, $168,000, and $403,000 for the years ended December 31,
1999, 1998, and 1997, respectively. In the opinion
27
<PAGE>
Clean Diesel Technologies, Inc.
Notes to Financial Statements (Continued
of the Company's management, such cost allocations are fair and reasonable and
are on terms no less favorable than could be obtained from a third party.
Average trade balances due to Fuel Tech for the years ended December 31,
1999 and 1998, approximated $57,000 and $37,000, respectively.
The Company makes annual pension payments or accruals pursuant to a
deferred compensation plan on behalf of its Chief Executive Officer. For the
years ended December 31, 1999, 1998 and 1997, $50,000, $50,000 and $45,200 of
expense was recognized in connection with such plan. At December 31, 1999 and
1998, accrued expenses include $132,700 and $82,700 pertaining to this plan,
respectively.
8. Marketing and Joint Development Agreements
The Company and AMBAC International reached an agreement in December 1997
under which the parties will jointly share in the cost of development of the
ARIS injector for urea SCR. The Company holds the exclusive marketing rights to
the injector for a period of five years subject to certain minimum purchases of
injectors from AMBAC. The Company has agreed to purchase injectors exclusively
from AMBAC or to pay AMBAC for 50% of AMBAC's development cost and a royalty on
injectors made elsewhere for the Company. The Company has assigned its rights
with AMBAC to the RJM Corporation as part of its License Transaction. (See
Footnote 9, "Subsequent Events" to the accompanying Financial Statements).
No rights or licenses have been granted by either party to the other on
patents or inventions conceived prior to the agreement. However, the parties
have filed a joint patent on the specific ARIS injector. The Company has
retained all rights to its underlying patents including the fundamental
return-flow injection concept on which the US patent office has issued a "notice
of allowance."
AMBAC is currently assembling complete ARIS 2000 injector systems for the
Company according to the Company's proprietary design. The Company considers its
relationship with AMBAC to be good.
9. Subsequent Events
On February 2, 2000 the Company announced it had finalized its previously
announced License Agreement with the RJM Corporation. Under the agreement, CDT
will license RJM to sell the ARIS 2000 NOx control system for all stationary,
marine, and locomotive applications in North, Central and South America.
The agreement calls for CDT to license its stationary NOx business and
transfer its inventory along with two technical staff to RJM. In return, CDT
will receive an initial $360,000 payment for license rights and ARIS inventory.
The agreement also provides CDT the opportunity to earn an additional $1,000,000
in license revenue based on the sales performance of the ARIS 2000 over the next
36 months. In addition to the license payments, CDT will receive an ongoing
royalty on all future ARIS 2000 sales. CDT retains all rights to the ARIS
technology for mobile applications worldwide as well as stationary applications
in all other territories not licensed to RJM.
In February 2000, the Board of Directors of the Company approved the
issuance of the Company's Common Stock in consideration of their accrued
Directors' fees at December 31, 1999 (totaling $47,000), and for all future
fees. A director may choose to receive either all stock or 20% cash and 80%
stock.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
28
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant
Information regarding directors and executive officers of the Company
will be set forth under the captions "Election of Directors" and "Directors and
Executive Officers of the Company" in the Company's Proxy Statement related to
the 2000 annual meeting of stockholders (the "Proxy Statement") and is
incorporated by reference herein.
Item 11. Executive Compensation
Information required by this item will be set forth under the caption
"Executive Compensation" in the Proxy Statement and is incorporated by reference
herein excluding, however, the information under the captions "Report of the
Board of Directors on Executive Compensation" and "Performance Graph," which is
not incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this item will be set forth under the caption
"Principal Stockholders and Stock Ownership of Management" in the Proxy
Statement and is incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions
Information required by this item will be set forth under the captions
"Compensation Committee Interlocks and Insider Participation" and "Certain
Relationships and Related Transactions" in the Proxy Statement and is
incorporated by reference herein.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements
The Financial Statements identified below and required by Part II, Item
8 of this Form 10-K are set forth above.
Report of Independent Auditors
Balance Sheets as of December 31, 1999 and 1998
Statements of Operations for the years ended December 31,
1999, 1998 and 1997
Statements of Changes in Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997
Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997
(2) Financial Statement Schedules
Schedules have been omitted because of the absence of the conditions under
which they are required or because the required information where material
is shown in the financial statements or the notes thereto.
29
<PAGE>
(3) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Title
----------- -----
<S> <C>
*3(i) Certificate of Incorporation. o
**3(ii) Certificate of Amendment of Certificate of Incorporation, effective
June 22, 1998. o
*3(iii) By-Laws. o
++3(iv) Certificate of Designation for Series A Convertible Preferred Stock. o
o3(v) Certificate of Amendment of Certificate of Designation for Series
A Convertible Preferred Stock. o
**3(vi) Second Certificate of Amendment of Certificate of Designation for
Series A Preferred Stock. o
*4a Specimen Stock Certificate, Common Stock. 0
++4b Specimen Stock Certificate, Series A Convertible Preferred Stock. o
+10a Assignment of Intellectual Property Rights Fuel-Tech N.V. to
Platinum Plus, Inc. as of November 5, 1997. o
+10b Assignment of Intellectual Property Rights Fuel Tech, Inc. to
Clean Diesel Technologies, Inc. as of November 5, 1997. o
+10c Assignment Agreement as of November 5, 1997, among
Platinum Plus, Inc., Fuel-Tech N.V., and Clean Diesel Technologies, Inc. o
*****10d 1994 Incentive Plan, as amended through August 8, 1996. o
**10e Amendment of Section 5.1 of 1994 Incentive Plan, effective June9, 1999. o
****10f Management Services Agreement between Clean Diesel Technologies, Inc.,
Fuel Tech, Inc., and Fuel-Tech N.V. as of June 1, 1996. o
***10g Office Premises Lease of January 26, 1996. o
+10h Registration Rights Agreement between Clean Diesel Technologies, Inc.
and Fuel-Tech N.V. of November 5, 1997. o
+++10i Registration Rights Agreement between Clean Diesel Technologies, Inc.
and the holders of Series A Convertible Preferred Stock as of November 11, 1998. o
++10j Bridge Loan Agreement between Clean Diesel Technologies, Inc.
and the several lenders set forth on Schedule A thereto dated May 8, 1998. o
+++10k Loan Note Agreement between Clean Diesel Technologies, Inc. and the
several lenders set forth on Schedule A thereto dated November 11, 1998. o
*+10l Material Foreign Patents. o
++++10m License Agreement as of 31 January 2000 between Clean Diesel
Technologies, Inc. and RJM Corporation. o
++++10n NOx Reduction Assets Purchase Agreement as of 31 January 2000
between Clean Diesel Technologies, Inc. and RJM Corporation. o
**23.1 Consent of Independent Auditors, Ernst & Young LLP. o
----------------------------
o Incorporated by reference.
* Previously filed as Exhibit to Registration Statement on Form S-1 of August 16, 1995, No. 33-95840.
** Filed herewith.
*** Previously filed as Exhibit to Form 10-K for the year ended December 31, 1995.
**** Previously filed as Exhibit to Form 10-Q for the quarter ended September 30, 1996.
***** Previously filed as Exhibit to Form 10-K for the year ended December 31, 1996.
[ ] Previously filed as Exhibit to Form 10-K for the year ended December 31, 1998.
+ Previously filed as Exhibit to Form 10-K for the year ended December 31, 1997.
++ Previously filed as Exhibit to Form 8-K dated May 26, 1998.
+++ Previously filed as Exhibit to Form 10-Q for the quarter ended September 30, 1998.
++++ Previously filed as Exhibit to Form 8-K dated February 1, 2000.
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company for the fourth quarter
of 1999.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Clean Diesel Technologies, Inc. has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
CLEAN DIESEL TECHNOLOGIES, INC.
March 31, 2000 By: /s/ Jeremy D. Peter-Hoblyn
- --------------------------- ----------------------------
Date Jeremy D. Peter-Hoblyn
Chief Executive Officer,
President, and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been duly signed below by the following persons on behalf of
Clean Diesel Technologies, Inc. and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
<S> <C>
/s/ Ralph E. Bailey Director and Chairman of the Board of Directors
- -------------------------
Ralph E. Bailey
/s/ Jeremy D. Peter-Hoblyn Chief Executive Officer, President, and Director
- -------------------------- (principal executive officer)
Jeremy D. Peter-Hoblyn
/s/ David W. Whitwell Chief Financial Officer, Vice President, and Treasurer
- ------------------------- (principal financial and accounting officer)
David W. Whitwell
/s/ Douglas G. Bailey Director
- -------------------------
Douglas G. Bailey
/s/ John A. de Havilland Director
- -------------------------
John A. de Havilland
/s/ Derek R. Gray Director
- -------------------------
Derek R. Gray
/s/ Charles W. Grinnell Director, Vice President, and Corporate Secretary
- -------------------------
Charles W. Grinnell
/s/ James M. Valentine Director, Chief Operating Officer, and
- ------------------------- Executive Vice President
James M. Valentine
</TABLE>
Dated: March 31, 2000
<PAGE>
3 (ii)
CERTIFICATE OF AMENDMENT OF THE
CERTIFICATE OF INCORPORATION
OF CLEAN DIESEL TECHNOLOGIES, INC.
THE UNDERSIGNED does hereby certify that CLEAN DIESEL TECHNOLOGIES, INC., a
corporation organized and existing under the General Corporation Law of the
State of Delaware (the "Corporation"), has duly adopted the following amendment
of Article 4 of its Certificate of Incorporation in accordance with the
provisions of ss. 242 of the Delaware General Corporation Law:
Article 4 of the certificate of incorporation of the Corporation
be, and it hereby is, amended by revoking in its entirety the
first paragraph of said Article 4 and the following being, and
it hereby is, substituted in its place as follows:
"4. The corporation shall have authority to issue the total number
of Fifteen Million One Hundred Thousand (15,100,000) shares of
the par value of $0.05 per share, amounting in the aggregate to
Seven Hundred Fifty Five Thousand Dollars ($755,000) and of such
shares Fifteen Million (15,000,000) shall be designated as
common stock and One Hundred Thousand ($100,000) shall be
designated as preferred stock."
IN WITNESS WHEREOF, the Corporation has issued this Certificate of Amendment of
Certificate of Incorporation to be signed by its Secretary, Charles W. Grinnell,
this 17th day of June 1998.
CLEAN DIESEL TECHNOLOGIES, INC.
By: /s/ Charles W. Grinnell
-------------------------------
Director, Vice President, and
Corporate Secretary
32
<PAGE>
3 (vi)
SECOND CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF DESIGNATION
OF
PREFERRED STOCK
OF
CLEAN DIESEL TECHNOLOGIES, INC.
Clean Diesel Technologies, Inc. (the "Company"), a corporation organized
and existing under the General Corporation Law of the State of Delaware, does
hereby certify as follows:
FIRST: That in accordance with the requirements of Sections 141 and 242 of
the General Corporation Law of the State of Delaware, the Board of Directors of
the Company duly adopted a resolution proposing and declaring advisable that (i)
the second sentence of Section 1(a) of the Certificate of Designation, as
amended (the "Certificate"), for the Company's Series A Convertible Preferred
Stock (the "Stock") be amended to provide as follows: "The number of shares of
this Series shall be 15,000 registered shares, par value $0.05 per share" and
(ii) such amendment be recommended to the holders of the Stock and be submitted
to such holders for their consent and approval.
SECOND: That thereafter, pursuant to a resolution of the Board of Directors
of the Company, the holders of the Stock, in accordance with Sections 228 and
229 of the General Corporation Law of the State of Delaware, on August 20, 1999
duly consented to and approved the aforesaid amendment of the Certificate.
IN WITNESS WHEREOF, the Company has caused this Second Amendment to
Certificate of Designation of Preferred Stock to be duly executed and
acknowledged in accordance with Section 103 of the General Corporation Law of
the Sate of Delaware on this 23rd day of August 1999.
CLEAN DIESEL TECHNOLOGIES, INC.
By: /s/ Charles W. Grinnell
-------------------------------
Director, Vice President, and
Corporate Secretary
33
<PAGE>
10 e
Amendment
of
1994 Incentive Plan
of
Clean Diesel Technologies, Inc.
effective June 9, 1999
5.1 Maximum Number of Shares
The maximum number of Shares available for Awards under this Plan in each
calendar year during any part of which this Plan shall be in effect shall be
such fixed amount of Shares as the Board shall be from time to time determine
but not more than 17 1/2% of the issued and outstanding Shares of the
corporation. For this purpose, the issued and outstanding Shares of the
Corporation shall include from time to time the number of Shares into which
convertible securities of the Corporation may then be converted. Treasury stock
shall not be deemed to be issued and outstanding. Any and all such Shares may be
issued in respect of any of the types of Awards.
34
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to (i) the incorporation by reference in the Registration Statement
(Form S-8 No. 333-16939) pertaining to The 1994 Incentive Plan of Clean Diesel
Technologies, Inc., as amended through June 9, 1999 of our report dated March 7,
2000, with respect to the financial statements of Clean Diesel Technologies,
Inc. and (ii) the inclusion of our report in this Annual Report (Form 10-K) for
the year ended December 31, 1999.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
March 23, 2000
- --------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 892,000
<SECURITIES> 0
<RECEIVABLES> 46,000
<ALLOWANCES> 0
<INVENTORY> 321,000
<CURRENT-ASSETS> 1,311,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,346,000
<CURRENT-LIABILITIES> 690,000
<BONDS> 0
0
1,000
<COMMON> 130,000
<OTHER-SE> 525,000
<TOTAL-LIABILITY-AND-EQUITY> 1,346,000
<SALES> 142,000
<TOTAL-REVENUES> 142,000
<CGS> 81,000
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,643,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,000
<INCOME-PRETAX> (4,584,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,584,000)
<EPS-BASIC> (1.77)
<EPS-DILUTED> 0
</TABLE>
